Speaking at the Alternative Investment Management Association (AIMA) conference in Sydney yesterday, AQR Capital Management co-founder Cliff Asness said hedge funds are more exposed to stock markets than people think.
AQR Capital Management has been considering the question of whether 'hedge funds hedge' for 16 years, Mr Asness said.
"The answer is 'yes', but they’re more net long on average," he said. "They're more exposed to markets than maybe people would have believed."
People no longer refer to hedge funds as uncorrelated investments, Mr Asness said – adding that this was probably never the case anyway.
"Some funds are [uncorrelated with markets], but on average we have a pretty healthy positive beta and a pretty positive correlation to markets," he said.
As a result, the traditional '2 and 20' hedge fund fee (ie, a 2 per cent investment fee plus a 20 per cent performance fee) typically pays for, in part, a passive exposure to markets, he said.
"But if you’re paying 2 and 20 for something that is both aggressive and unrelated to markets, that may in fact be worth it," he said, adding that it might therefore be simplistic to say hedge fund fees are too high.
"Net as an industry, yes, fees are too high. But it’s not necessarily that you can’t justify a very high fee," he said.
Mr Asness' suggestion for improving fee structures in the hedge fund industry is to tie fees to the market correlation delivered to investors.
"The fee you get, the percentage you get, would vary on the correlation you deliver – not just the return," he said.
"So for the same return you’d get a higher percentage if it was more diversified."
He admitted the idea has been "wildly unpopular" with the hedge fund managers to whom he has suggested it.
"But at least it makes a statement – [it says you're willing to put your] money where your mouth is," he said.
Mr Asness added he "wasn't bluffing" and is willing to to implement the fee structure in his own business.
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